Sunday, May 17, 2009

Driving vs. Trading

As we get closer to Memorial Day and "driving season" -- I sometimes compare driving in traffic to trading. Once in a while, we're in the "fast lane" and we're zipping along. Happily, trading is sometimes like this (unfortunately, not often enough!).

Other times, the other lanes are moving faster. Cars are zipping by us... What do we do? Do we try to switch lanes as quickly as we can? Whenever we do that, it seems like our original lane "catches up" and we get passed by, yet some more. In this case, the "noise" of the traffic can get us. Similarly, the randomness or the "noise" of the markets can get the best of us if we are too hasty in our trading.

If we just stay in the slow lane forever, however, we sometimes see that there is a breakdown in our lane -- and that's the reason why we have been in the slowest lane! In trading, that would be the equivalent of just sitting on a loss until the loss becomes huge. That's a "no-no" as well.

In trading, we have to find a good middle ground... We can't be too hasty and get "tricked by the noise" -- but we also need to avoid staying in a losing position too long.